Barney Frank and Financial Reform in Newsweek has posted an article by Michael Hirsh about the process of financial reform from its next issue titled Why is Barney Frank So Effing Mad? What does Hirsh find about what is going on with the house bill, and why is Frank so effing mad?

Hirsh makes it to the second paragraph before Frank walks out of an interview when asked about derivatives legislation, the source of much of Frank's frustrations these days. One of the major sources of headache for the financial reform bill has been with what kind of exceptions should be made for derivatives: under what circumstances should we regulate derivatives less than other circumstances? And, once given an exception, how easy will this be able to be manipulated? Here's the take from Hirsch:

The financial industry has argued that curbs on derivatives don't hurt just Wall Street but also the corporations in Main Street America--the "end users" --that need them to hedge risks. Airlines, for example, use derivatives as protection against sudden gyrations in fuel costs by "swapping" interest-rate payments or currencies with other companies. No one doubts derivatives are useful for that. What upsets Wall Street critics is that the banks that sell these contracts to corporations prefer the derivatives to be privately negotiated off exchanges. The more custom-made and out of public sight a derivative is, the harder it is for investors--and regulators--to assess its fair value and real risk. This makes it easier for the banks to charge a large "spread" and earn big profits. "It's like the used-car market, except that it's even less transparent," says Adam White, a derivatives expert at White Knight Research in Atlanta. The banks deny critics' charges that they are keeping prices high; many end-user companies are willing to do the deals privately because they aren't required to post -capital to cover margins, as regulators would require.

The initial compromise was viewed by many as too generous and too easy to be gamed. Newsweek quotes Maryland law professor and ex-federal regulator Michael Greenberger as saying (to The Boston Globe) that Frank has "walked away from the concerns of the major unions, consumer groups, and environmental groups" and that, in the early stages, "I don't think he ever fully understood the legislation." (Greenberger also worked for CFTC Chairperson Brooksley Born in the late 1990s, when she was being pushed out of regulatory power by Summers and Greenspan for wanting to regulate in this area, so one can imagine he's charged up about reform).

There's some interesting allegations for how the lobbying effort has gone brought up by Newsweek:

In the first three quarters of 2009, financial-industry interests have spent $344 million on lobbying efforts, putting them on pace to break all records, according to the Center for Responsive Politics. That's just for lobbyists' and lawyers' salaries, junkets, and dinners, and doesn't include political donations and issue ads. Even more impressive is the lobbying strategy that money is buying. According to insiders and industry e-mails obtained by NEWSWEEK, the banks have sought to stay in the background and put their corporate customers--a who's who of American business, including Apple, Whirlpool, and John Deere--out in front of the campaign. "This is an orchestrated, well-funded effort by the banks to manipulate our legislation and leave no fingerprints," says a congressional staffer involved in drafting the legislation. The staffer, who would speak only on condition of anonymity, passed on to NEWSWEEK nine pages of proposed changes in the legislation intended to protect trading from open scrutiny--all of it on paper without a letterhead--that she says came from Goldman Sachs. Samuel Robinson, a spokesman for Goldman, says "it's not our document" but adds that Goldman has "an active and appropriate involvement in the process of government" and supports "sensible reform."

That's more than a $1 per person living in the United States spent in lobbying during 9 months. Atlantic Business is going to see if we can get a copy of the proposed changes to the Frank Bill to figure out what they would have done.

The article concludes that this battle isn't over yet.

Wall Street lobby isn't giving up. After Frank had toughened up his stance on derivatives, the lobby tried to redefine what certain kinds of exchanges do, according to a former lobbyist involved in the strategy who would divulge it only anonymously. Under the lobby's proposed changes, a new kind of exchange called an "alternative swap execution facility" would have required only that derivatives trades be documented after they were completed, says the lobbyist. But the trades wouldn't be open to bidding--or easily regulated...Now the lobbyists are working the Senate side, where banking-committee chairman Chris Dodd is also facing pressure to exempt end users. Frank insists he will get the law right in the end, and he's soliciting more views from his traditional liberal base.

The financial industry is really going hard after the current reform measures. How will it end up is still up in the air.